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What Was the Point of Bailing out GM?

This article is the first of a three part series.
Part I | Part II |
Part III

General Motors should have filed for Chapter 11 bankruptcy
protection last fall, if not earlier. It was obvious in 2008 that
GM was deep in the red, burning through cash, struggling to service
debt, suffering steep sales declines, facing bleak prospects and
failing to find new sources of capital.

In November, GM turned to the federal government for a bailout
loan — the one final alternative to bankruptcy. After a lot
of discussion and some rich debate, Congress voted against a
bailout, seemingly foreclosing all options except bankruptcy. But
before GM could avail itself of bankruptcy protection, President
Bush took the fateful decision of circumventing Congress and
diverting $15.4 billion from Trouble Asset Relief Program funds to
GM (in the chummy spirit of avoiding tough news around the
holidays).

That was the original sin. George W. Bush is very much complicit
in the nationalization of GM and the cascade of similar
interventions that may follow. Had Bush not funded GM in December
(under questionable authority, no less), the company probably would
have filed for bankruptcy on Jan. 1, at which point prospective
buyers, both foreign and domestic, would have surfaced and made
bids for spin-off assets or equity stakes in the “New GM,” just as
is happening now.

Of course, a bankruptcy judge, acting in an apolitical
environment, would have had to determine whether GM could emerge
from Chapter 11 as a going concern. That determination might have
necessitated different concessions from different stakeholders. For
example, the United Auto Workers union might have had to accept
real pay cuts (not just revamped work rules) and the secured
bondholders might not have been strong-armed into taking pennies on
their investment dollars. And, certainly, taxpayer resources would
not have been tapped. Sure, there would have been plant closures,
dealership terminations and jobs losses, just as there are under
the current nationalization plan.

But the path we’ve taken, regrettably, goes through an
expensive, political minefield. If GM emerges from bankruptcy
organized and governed by the plan created by the Obama
administration, it is impossible to see how free markets will have
anything to do with the U.S. auto industry henceforth. With
taxpayers on the hook for $50 billion (at a minimum), the
administration will do whatever it has to — including tilting
the playing field with policies that induce consumers to buy GM,
hamstring GM’s competition or subsidize its costs — for GM to
succeed. Thus, $50 billion is a sum that is more likely to grow
larger than it is to be repaid. It is also a sum that will serve as
the rationalization for further government interventions on GM’s
behalf.

Thus, what’s going to happen to Ford? With the government
backing GM, will Ford’s access to capital be compromised? Can it
compete against an entity backed by an unrestrained national
treasury? Or are there more government-sponsored bankruptcies in
our future?